The high-to-low range of a consolidating market offers excellent opportunities for traders who are adaptable enough to trade them. John Mauldin, in Bull’s Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market (Hoboken, NJ: John Wiley & Sons, 2005), states that the shortest bear on record is eight years, with the average being 16 years.
During these periods, it seems as if the market’s actions are guided by some shrewd NFL offensive coordinator—just when it looks like the market is going long it pulls up short, jukes left and rolls right, leaving a pile of stunned investors in its wake.
Consolidating markets are tricky. Just when you think you’ve got them figured out, you end up the wrong way on a big move and you feel like you’ve been betrayed by everything you know. Many traders begin to think of the market as a cunning adversary who tries to foil their best-laid plans, or perhaps a tempting siren, bent on luring them to the bottom of their bank accounts.
In a long-term bull market, or a “relative-return market,” you can succeed by simply staying fully invested and matching the market’s steady rise. In a bear, or consolidating market, such as the one we’re in now, savvy traders seek to identify and profit from mispriced securities, both on the long as well as short side of the market. Achieving “absolute returns” (returns that consistently exceed the risk-free rate, regardless of market direction) requires skill, self-knowledge, an understanding of market and investor behavior, and trading maturity. The point here is that the relative and absolute approaches exist at opposite ends of the spectrum, and bracketing market conditions reward absolute-return investors—those individuals who are concerned with the value of their portfolios at every point in time, not just at some predetermined maturation.
If history continues to repeat itself, as it has for the past five years, then the 20-year bull run will fade farther into the past, and a substantially different approach to market understanding will be required to consistently succeed.
It is worth noting here that Mind over Markets, the first collaboration between these authors, was written in the middle of the great bull market, when most investors had already climbed aboard the relative-return train.
The theories and practices prescribed in that book are as applicable today as they were then—there is still unexpected volatility in bull markets, and Mind over Markets provided a detailed treatise on taking advantage of such volatility. Since the great bull, market mechanics and human behavior have not changed, although much around them has. With the proliferation of hedge funds, for example, there is more short-term momentum trading, which means that markets tend to move faster and go further once a movement has started. But bull or bear or bracket, markets always conform to the fundamental dictates of time, price, and volume.
Read More : Succeeding In An Absolute Return Market Environment
